Image © European Union 2016 – European Parliament
After last week’s market turmoil, the financial markets opened Monday, which saw a follow through in risk aversion. The British pound extended its declines off Friday’s lows, to open lower at 1.3427 as selling intensified as the day progressed.
UK’s Chancellor of the Exchequer, George Osborne, broke his silence for the first time since the Brexit verdict was delivered on Friday, June 24th. In an apparent bid to soothe the markets, Osborne said that Britain is open for business saying, “Britain is ready to confront what the future holds for us from a position of strength. Our economy is about as strong as it could be to confront the challenge our country now faces.” By Monday’s close, GBPUSD touched down to new lows at $1.3121 but managed to recover slightly to close at $1.3224. Economic data on Monday was fairly quiet with New Zealand posting another trade surplus in May.
By Tuesday, risk aversion started showing signs of fading. EU leaders converged in Brussels for the first time with the UK seat left vacant. There were a few scenes of political bickering between Nigel Farage and EU Commission president, Jean-Claude Junker. German Chancellor Angela Merkel ruled out any intentions of pre-negotiations with the UK until Article 50 was invoked, and the EU leaders were rather unanimous in their response to the UK to find a quick resolution to invoke the exit proceedings.
Britain is ready to confront what the future holds for us from a position of strength. Our economy is about as strong as it could be to confront the challenge our country now faces.
The UK’s credit ratings took a hit as well with Standard&Poors downgrading UK’s ratings from AAA to AA and putting on a negative watch list. Fitch Ratings also lowered the UK’s ratings to AA from AA+. Meanwhile, the markets moved back to focus on the economic data. US Q1 GDP figures reported showed a final revised number of 1.10%, higher than the second estimate of 1.0%.
The markets continued to extend the gains days into Wednesday. Japan was hit by weak retail sales numbers while in the US consumer spending and income grew at a modest pace, rising 0.40% and 0.20% respectively. Despite the risk-on sentiment, gold prices remained above the $1300 handle and price action was rather subdued.
On Thursday, the focus was back to the economic data. In the Eurozone, preliminary inflation estimates showed that that the eurozone headline inflation rose 0.10% on the year in June, while the core CPI, which excludes food and energy prices rose 0.90%, accelerating the previous month’s 0.80%. In Japan, preliminary industrial output data fell 2.30% on the month in May marking the first decline in three months. In the UK, final estimates of the first quarter GDP was unchanged at 0.40%, but business investment remained weak during the quarter.
On Thursday evening, BoE Governor, Mark Carney gave a speech and hinted that following the UK’s decision to leave the EU, the central bank was looking into potential rate cuts and QE. The central bank is expected to give a full assessment of the economic impact of Brexit by August policy meeting. The sterling fell sharply following his comments, but the FTSE100 managed to close with strong gains on the prospects of QE.
On the commodity front, gold prices remained muted for the most part this week. Despite a risk on rally, gold held on to its gains, supported above the $1300 handle. Crude oil futures were trading mixed this week after briefly turning bullish following Wednesday’s EIA crude oil inventory report which showed that US commercial stockpiles fell for the sixth week in a row. WTI crude oil prices briefly touched highs of $49.99 before giving back some of the gains by Friday.
The markets were fairly quiet on Friday with the manufacturing PMI’s in Eurozone and the UK rising more than expected. In Japan, consumer confidence was also high, but the underlying theme was that the surveys were conducted ahead of the June 23rd referendum date. Japan’s tankan manufacturing and non-manufacturing surveys pointed to a weak pace in the sector, and latest inflation figures did not paint a rosy picture either, all of which is likely to weigh heavily on the BoJ when it meets later this month.
Summary of Economic events this week
- New Zealand trade balance 358mn vs. 185mn
- Eurozone M3 money supply y/y 4.90% vs. 4.80%
- Eurozone private loans 1/60% vs. 1.60%
- US goods trade balance -60.6bn vs. -59.5bn
- US flash services PMI 51.3 vs. 52.0
- German import prices m/m 0.90% vs. 0.60%
- EU economic summit
- US final GDP q/q (Q1) 1.10% vs. 1.0%
- US final GDP price index q/q 0.40% vs. 0.60%
- US S&P/CS HPI m/m 5.40% vs. 5.50%
- US CB consumer confidence 98.0 vs. 93.20
- Japan retail sales y/y -1.90% vs. -1.60%
- Australia HIA new home sales m/m -4.40% vs. -4.70% previously
- German Gfk consumer climate 10.1 vs. 9.8
- UK net lending to individuals m/m 4.3 billion vs. 2.9 billion
- UK M4 money supply m/m 1.20% vs. 0.10%
- UK mortgage approvals 67k vs. 65k
- US Core PCE price index m/m 0.20% vs. 0.20%
- US personal spending m/m 0.40% vs. 0.40%; personal income m/m 0.20% vs. 0.30%
- Pending home sales m/m -3.70% vs. -0.90%
- Japan industrial production preliminary m/m -2.30% vs. -0.10%
- German retail sales m/m 0.90% vs. 0.70%
- French consumer spending m/m -0.70% vs. -0.10%
- France preliminary CPI m/m 0.20% vs. 0.20%
- UK current account -32.6bn vs. -27.3bn
- UK final GDP q/q 0.40% vs. 0.40%; index of services 3m/3m 0.50% vs. 0.40%
- Eurozone flash estimate y/y 0.10% vs. 0.0%; core CPI y/y 0.90% vs. 0.80%
- Canada GDP m/m 0.10% vs. 0.10%
- US weekly unemployment claims 268k vs. 267k
- Japan BoJ Core CPI y/y 0.80% vs. 0.80%
- Japan Tankan manufacturing index 6 vs. 4; Tankan non-manufacturing index 19 vs. 19
- China manufacturing PMI 50 vs. 50; non-manufacturing PMI 53.7 vs. 53.1 previously
- Japan final manufacturing PMI 48.1 vs. 47.9
- Japan consumer confidence 41.8 vs. 41.1
- Swiss retail sales y/y -1.60% vs. -1.70%
- Eurozone final manufacturing PMI 52.8 vs. 52.6
- UK manufacturing PMI 52.1 vs. 50.0
- Eurozone unemployment rate 10.10% vs. 10.10%